The Importance of Diversification

“Don’t put all of your eggs in one basket!” You’ve probably heard that over and over again throughout your life. This advice is especially important when it comes to investing. Diversification is one of the most important keys to successful investing. All successful investors build portfolios that are widely diversified, and you should too!

Diversifying your investments might include purchasing various stocks in many different industries. It may include purchasing bonds, investing in money market accounts, or even in some real property. The key is to invest in several different areas, not just one.

Over an extended period of time, investors who have diversified portfolios usually see more consistent and stable returns from their investments than those who just invest in one thing. By investing in several different markets is actually less risky.

For example, if you have invested all of your money in one stock, and that stock takes a significant plunge, you will likely lose a lot of your money. On the other hand, if you have invested in ten different stocks, and nine are doing well while one plunges, you are still in fairly good shape.

Good diversification will often include stocks, bonds, real property, and cash. It may take time to diversify your portfolio. Depending on how much you have to initially invest, you may have to start with one type of investment, and invest in other areas as time goes by.

This is okay, but if you can divide your initial investment funds among various types of investments, you will find that you have a lower risk of losing your money, and over time, you will likely see better returns.

Experts also suggest that you spread your investment money among your investments. In other words, if you start with $100,000 to invest, invest $25,000 in stocks, $25,000 in real property, $25,000 in bonds, and put $25,000 in an interest bearing savings account.

Diversification may reduce your chances of getting lucky by experiencing huge returns in one large investment, but it is far better to intelligently manage your capital so you can weather financial storms and have funds available for excellent investments as they arise. It's also crucial that your investment funds survive and grow, even if it is a modest rate, so you will have enough money to finance your retirement.